Only just received the 2015 copy of the “Good, Bad Ugly” report on the Australian Accounting profession prepared by Business Fitness. Makes for interesting reading.

There are a couple of points that are worth repeating:

revenue per partner has decreased by 8.9%;

average client fees have reduced by over 18% in the past two years;

for firms using timesheets, productivity is falling;

lower marketing spend over the past three years; and

6% increase in firms using outsourcing (reasonable number, but not very many firms are doing it).

There is one very telling comment made in the introduction to the statistics in the report (my highlights):

When analysing the 14 years’ worth
of data relating to high-performing
firms, we can conclusively say thatproductivity based on chargeablehours has no correlation toprofitability.

Having just returned from the Verasage get-together in Boston, it has become even more apparent that the old models of firm management are not only redundant, they are dangerous. Much of the discussion at the symposium related to the way successful firms focus on relationships – both internal and external. This has to do with building, maintaining and honoring decent relationships. Not relationships where everything is about flogging the crap out of your people and billing the hell out of your clients. Relationships which are based on trust, accountability and common goals.

Having seen the damage done by the Almighty Billable Hour and looking at the impact this approach has on the cultures of firms, it amazes me that so many firms still use this model.

There is change already here in our industry and, as the GBU report reveals, this change is having an all-pervasive impact on our profession. Either adapt or die.

In recent posts here, I have argued as to the effectiveness of various forms of measurement and their utility in managing outcomes.

I have just posted in further detail on our firm website (and, to keep Ron and Ed happy, I haven’t referred to cricket, but rather Aussie Rules football). I encourage you to have a read – let me know what your thoughts are.

Over the past few days, my understanding of “why” firms won’t move from the timesheet model has had a breakthrough.

It’s really quite simple – people feel they need to “measure” their performance in some quantitative manner. This means that they prefer to use an inherently subjective measurement forms the basis of their perception as to how they have “gone” in doing their work. This sheeted home to me the other day when I was having a chat with one of my gurus at work. They wanted to know whether they had progressed over the past year and how successful they had been in delivering outcomes.
The discussion turned to the methods we could use to assess how they had performed. All good, but the conversation then progressed to a point where we were discussing the difference between qualitative and quantitative measures. Now, being accountants, we inherently prefer to use quantitative measures – things like gross margin, profitability, ROI, efficiency and the like. All good and useful in some respects, but the measurement is usually only an indication of something else that relates to qualitative issues.

Let me explain. In our conversation, we talked about the things that were really important to our firm – things like development of each other in technical and non-technical ways (communication, customer relations etc). These things are incredibly difficult to measure – so difficult that I am not aware of any way of objectively assessing them. As I pointed out to my team member, they had contributed incredibly to the development of one of their support people over the past 12 months. They had lead by example and created a more rapid pathway for the person concerned to develop their career – personally and professionally. The leadership provided and coaching and development have formed a platform for the support team member that will take them through their career. As I asked “How do you value that?” What method do we use to assess this level of contribution? In my view, such an assessment is going to be subjective and no two people would come to the same conclusion as to the “value” of that work.

In assessing this type of contribution, if we were using timesheets, we would be able to point out that the estimated time (do we record it in 6 minute or 10 minute increments) that might have been allocated to “development” or “training”. But, much of the training related to customer work so, should we allocate it to the customer? If we did allocate it to the customer, they would have every right to get pissed off that they were being “charged” for training. So many decisions!

How much time should we take in this work? Is here a benchmark or average (you know – where the best of the worst meets the worst of the best) that we should use to determine the input required? No. Everyone is unique and learns in their own particular style. There is no one over-arching approach that works for everyone and therefore, the time spent tailoring the training approach to achieve the best outcome is of incredible value (also, the trial and error process undertaken to work out the most effective approach). The value that my resident guru added to her team member was the combination of a range of skills, talents and abilities that they have developed over many years. And then, how do we attach an “hourly rate” to that? At the end of the day, does the arduous quantitative process we would need to go through to get the result add anything valuable to our analysis or inform our decision making?

The thing that really matters is that the outcome is effective. The process in itself is inefficient until such time as the trainer and trainee have worked out what works for them. Using a “one size fits all” approach will only create average outcomes and no-one wants to be average! Spending the time to work out effective outcomes is far better than recording the time spent. For example, if we knew that it took Manager A and Team Member B 20 hours to work out the most effective training method for Team Member B, can we use that when we look at the potential training time needed for Team Member C? Of course not. B and C are different people with different learning styles. To use the metrics from B to design the process for C stands a wonderfully unlikely chance of being useful to anyone for anything.

The measure of effectiveness should not be merely based on some subjective assessments that inform us of little and guide us nowhere. The effectiveness of what has been done in training lasts a long time (a lifetime?) and to try and reduce it to a number is devaluing the contribution that has been made.

And, because the analysis and assessment as to the effectiveness of what you do is so inherently subjective, most firms cling on to timesheets – they know they’re not right. They know they are subjective. They know they are a pain in the you-know-what. But they are too scared to let them go as they believe it’s all they have. Sad really.

OK, so we’ve all got them. You know, those things that we look back on and think “what the hell – why did I do that?” or, (even worse) “why didn’t I do that?”

I’ve had plenty – more of the former type than latter, but it all forms part of the rich tapestry of life that we humans form part of. And, much as we may regret things, it helps us develop into the people we are and forms the foundations of who we will be. Great.

BUT, what would happen if you knew that something was going to happen and, despite every nerve in your body screaming at you to do something, you didn’t “do it” (whatever “it” might be) – is that really a regret? If you adopted a stance of denial, does that turn into a form of regret?

How is it that, even when confronted with massive amounts of evidence supporting a reality that is going to occur (and I’m not talking “consensus” here) – I am talking incontrovertible facts – you still don’t make the moves that are required?

I’m not going to launch into semantics here (I will leave that to my far more learned colleagues in Verasage), I am just trying to posit the argument that often times, people do not do what they should and don’t take action when they should or find a million reasons not to do something they know they need to because, well, they have lost something.

What is the loss they have made?

Consider if you will the current state of the accounting profession. We are seeing massive changes set upon us – mainly from technology/cloud solutions, but also from offshoring operations. Did you know, for example, that most of the Big Four have established offices throughout Asia to which they “in-source” their compliance work at (about) AUD10 per hour? I know of an Australian example where a large corporate has moved a significant volume of their processing/admin work to a Pacific nation as the effective wage rate there is AUD1.20 per hour – a bit better than the award rate over here!

This is all happening now. Today. To our beloved accounting profession. And what are the vast majority of our colleagues around the world doing about? Nothing.

I posted some time ago about the changes that were occurring to our profession. The changes that were coming then are rolling out even more quickly than I anticipated.

So, what is the profession doing to adapt to this change? Not much. Some of us a screaming to all who can be bothered to listen that there needs to be a change in business model. Hardly anyone seems to be listening. Or caring. And we are not, by the way, being “chooky looky” – the sky is falling in!

What are most accounting firms doing to try and combat the inevitable? They are trying to be more efficient. Making better time recording platforms and putting greater emphasis on staff productivity. Anyone recall Danny DeVito in “Other People’s Money”? Buggy whips.

To make the process more precise isn’t what’s required in the accounting profession today (or tomorrow). As Ron Baker is fond of saying – “I’d rather be approximately right than precisely wrong”. Bravo Ron! But tell that to the Luddites who persist with a 1950’s business model 65 years after it was made common place and 64 years after it became redundant.

The time-sheet is an anachronistic tool that does not fit with today’s requirements. Staff hate them, admin hates them, managers hate them and Partners/Directors hate them. The people who hate them most however, are the second most important people in your business – your customers.

In some respects, I am advocating a “back to the future” scenario – get rid of time-sheets – but with some important changes. Changes like agreeing the scope of work and price up front with your customer. The change which includes and involves your people in determining scope – and price! The one where you truly empower your people to shine rather than record their misery in 6 minute increments.

Ed Chan of Chan & Naylor last week posted on Linked In. Chan’s argument is that accountants sell time. No. We don’t. We sell solutions to our customers’ problems. His argument is that the “solutions” (I am expanding his argument a little here, but I believe it is in the same vein as what he has written) are all compliance-based whereby all we are doing is the “same thing” for each client. As I have illustrated above, the basis of a lot of the compliance work is going to be automated or off-shored. So scalability only applies if you’re doing basic, processing and bookkeeping work. Not exactly what we’re trained for is it?

Similarly, setting an arbitrary hourly rate to charge them for your time isn’t reflective of their need or the value that they place on the work to be done. Using the same rate for everything you do makes you pretty “average”. And remember – average is where the best of the worst meets the worst of the best.

My belief is that every customer is unique and have their own set of fears, needs and the like. To try and put them all in one basket is to demean both them and the people who work on their files.

Chan’s argument is also based on the premise that all you have to do is to hire more people and more customers will come to you. Oh, to live in such a wonderful world!

From my experience (such as it is), the only way you can achieve this is to discount your offering to a level that drives people to you. And then, what happens to “the margin” that Ed believes is the Holy Grail? That and the fact that you’ll generally get the bottom-feeding clients who don’t value what you do anyway and will bring a whole heap of their “friends” along with them – High School Chemistry – like attracts like. You will also not exactly engage your people as they merely become cogs in a never-ending grind out of tax returns. Inspiring isn’t it!

So, in Ed’s world, where “you build a business to prepare a tax return”, I believe there will be regrets. Lots of them.

Customers don’t want tax returns. They want advice. Support, Counsel. Encouragement. SOLUTIONS. The tax return work is only there because the government stipulates it. Nobody really “values” it in the true sense of the word. And the ultimate disruption? I know of at least one of the Big Four that will be offering their clients compliance work for $0 in the coming years. How’s “the margin” on that?

Getting the business model right for accounting firms is critical given the disruptive times we are in. Making a bigger or cheaper version of what exists won’t answer the challenge – it merely cements in a race to the bottom for those firms that don’t adapt.

Regrets? Yep, I have them. A number of them. One I do not have however is getting rid of time-sheets and moving to a business model that will sustain our business, our people and our customers for a long time.

Oh – the loss they have made that I referred to above? It’s a loss of self esteem and belief in why they do what they do. And that, my friends, can be scaled!

It isn’t about survival of the fittest. Darwin actually held that the most adaptable were the survivors. So, are you and your business adapting or are you heading down the path of the Dodo?

The current environment is one where there are so many changes taking place that the firm of 20 years ago will find it hard to compete. I know looking at my business and the work we do that to produce our current output, 20 years ago we would have required a heap more people and resources. Thankfully, technology has developed and enables us to create the results etc that our customers want and need.

But, there are two other components that are vital – your people and your customers. Unfortunately, a lot of firms “out there” have taken on (some very grudgingly) the technological change, but they have made few, if any steps, toward adapting their approach to their people or their customers.

Most of my thinking here comes from the “Growth Curve” approach which looks at “Three Gates” – people, process and profit. The technology has helped us deal with and adapt to the process gate, but I am seeing very little in the way of adaptation to the profit or people gates.

The profit gate needs to be adapted to by looking at the way that you engage with your customers, the service you offer them and the methods by which you price and they value what they get from you. The arcane approach that is the timesheet is becoming less and less popular (as can be evidenced by a brief review of other posts on this site) and customers are demanding more certainty, clarity and comfort that they are not signing on to an annuity stream for the advisor whereby they are being charged and billed for the advisor’s inefficiency or learning. In effect, given the timesheet places the customer and the advisor in directly opposed positions, the customer is now waking up to the fact that they want to know in advance what the price for the work will be. Those firms that do not adapt to this emerging reality will find it very difficult to retain or attract customers where other firms out there offer this as an alternative.

The people gate is the other area where firms are finding it difficult or are not wanting to adapt. The blunt object that is the timehseet that is used for performance management in many firms is rapidly becoming redundant. As an example, we recently advertised for an accountant and one of the headlines in the ad was “no timesheets”. We have had some sensational applicants for the role who are currently working in accounting firms in town where they are managed and measured by the timesheet. I don’t know about you, but if my performance is being measured in 6 minute increments, it is going to be fairly meaningless to me. I want to be judged on results and outcomes. Inputs are irrelevant. Hence – particularly with our Gen Y guys – our people want to be and remain relevant and highly valued based on what they have added to the business, not how much time they have spent doing it.

Many of the firms with which I speak are afraid of moving from the timehseet and adapting their business model to what the world is slowly going to demand of them. These poor bastards are going to be wondering what hit them in about 5 years’ time when it will be all to late.

They will have few staff and fewer customers but they will be able to account for every single minute of their day.